After the ECB meeting, we saw curve steepening in the eurozone. This is on top of curve steepening in the US since the elections. While we are nowhere near the magnitude of the 2013 Taper Tantrum, these yield curve dynamics remain negative for EM bonds and EM FX. EM equities are a different matter, supported in part by the continued post-election rally in DM equity markets. Higher commodity should also help insulate some EM countries from the selling pressure.
Individual country risk remains important, and likely to be dominated by politics. Brazil, South Africa, Turkey, and Korea are all facing heightened political uncertainty. Several central banks meet this week (Chile, Colombia, Peru, Russia, Korea, and Indonesia) but none are expected to move, especially in this current environment.
Turkey reports October current account and Q3 GDP Monday. Growth is expected to slow to 0.3% (2.0% WDA) y/y from 3.1% (3.0% WDA) in Q2. The economy remains weak, and so the central bank will remain under pressure to cut rates. Yet it should not ease while the lira remains under pressure. The next central bank policy meeting is December 20. It surprised markets with a hike last month.
Russia reports October trade Monday. Central Bank of Russia meets Friday and is expected to keep rates steady at 10.0%, though one analyst sees a 25 bp cut. Inflation has fallen to a cycle low 5.8% y/y in November, but remains above the end-2017 goal of 4%. Governor Nabiullina has signaled that rates could resume falling next year, and we see no reason for her to move up that timetable.
Mexico reports October IP Monday. ANTAD retail sales for November will be reported Tuesday. Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 5.5%. However, the market is split between 25 and 50 bp, while we favor 50 bp. November CPI rose 3.32% y/y, the highest since December 2014 and above the 3% target for the second straight month. PPI ex-oil rose 7.87% y/y while headline PPI rose even more (8.4% y/y). It seems that the inflation pass-through is really starting to bite and will require Banxico tightening next year as well.
China reports October IP, retail sales, and fixed asset investment Tuesday. They are expected to rise 6.1% y/y, 10.2% y/y, and 8.3% YTD, respectively. Inflation readings continue to pick up, and so we do not expect any further easing from the PBOC. Money and new loan data may come out this week, though no date has been set.
Brazil reports October retail sales Tuesday, which is expected to contract -7.2% y/y vs. -5.9% in September. It reports monthly GDP proxy for October Thursday, which is expected to contract -4.55% y/y vs. -3.67% in September. The economy remains in recession. While COPOM highlighted the possibility of a faster cycle, the impact on the economy probably won’t be felt until H2 2017. The next policy meeting is January 11. Whether it cuts by 25 or 50 bp then will depend in large part on external conditions.
India reports November CPI Tuesday, which is expected to rise 3.9% y/y vs. 4.2% in October. It reports November WPI Wednesday, which is expected to rise 3.1% y/y vs. 3.4% in October. The RBI delivered a hawkish surprise last week and kept rates steady. Most were looking for another 25 bp cut. Next RBI meeting is February 8. A lot can happen between now and then, but if inflation continues continue to fall, then a cut then seems likely.
Chile central bank meets Tuesday and is expected to keep rates steady at 3.5%. CPI inflation ticked higher to 2.9% y/y in November. While this is still below the 3% target, we do not see easing until Q2 2017, if at all. The economy remains very weak, but policymakers will have to be cautious in cutting rates if the Fed is raising rates.
South Africa reports November CPI Wednesday, which is expected to rise 6.6% y/y vs. 6.4% in October. If so, this would be the highest rate since February and would move further above the 3-6% target range. It also reports October retail sales that day, which is expected to rise 1.2% y/y vs. 1.4% in September. The economy remains sluggish, but rising price pressures and a weak rand will likely tie the SARB’s hands for now. Next policy meeting is January 24, and a lot will depend on external conditions then.
Bank Indonesia meets Thursday and is expected to keep rates steady at 4.75%. CPI inflation accelerated to 3.6% y/y in November after the trough of 2.8% in August. This remains in the bottom of the 3-5% target range, but is the highest rate since April. BI last cut rates 25 bp in October but stood pat in November. Rising price pressures should keep the bank on hold for now.
Bank of Korea meets Thursday and is expected to keep rates steady at 1.25%. CPI inflation was steady at 1.3% y/y in November. While still below the 2% target, it is the highest rate for the year. In light of domestic political uncertainty and external risks, we think BOK will remain on hold for the time being. Last move was a 25 bp cut in June. However, rising price pressures may turn the bank more hawkish in 2017.
Peru central bank meets Thursday and is expected to keep rates steady at 4.25%. CPI rose 3.3% y/y in November, and remains above the 1-3% target range. Easing won’t be seen until next year, if at all. Indeed, it will be generally hard for EM central banks to be cutting rates while the Fed is raising them, even is domestic price pressures ease.
Colombia central bank meets Friday and is expected to keep rates steady at 7.75%. One analyst sees a 25 bp cut. CPI inflation has eased four straight months from the peak of 9% y/y in July to the cycle low of 6% in November. This is still well above the 2-4% target range, but the disinflation will be welcomed. Colombia reports October retail sales and IP that day also. The former is expected at -1.0% y/y and the latter at +2.7% y/y. The economy remains weak, but the central bank will find it hard to cut rates next year if the Fed is hiking them.
Win Thin is the Global Head of Emerging Markets Strategy at Brown Brothers Harriman & Co.